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Why aren’t rental yields rising along with property prices?

All eyes are on Singapore’s real estate prices as the market picks up, and investors start to get curious on how rents relate to them. One thing for certain is that real estate prices do not always have a direct relationship with rentals in Singapore. For instance, as property prices recover, the private rental market continues to remain weak.

In this article, we seek to explore the relationship between property prices and rentals, and the reasons behind the decline in rental yield in recent years.

Private properties prices vs rentals

Following the URA property price index’s (PPI) reversal from its downtrend in 3Q2017, private home prices has continued to gain momentum into 1Q2018. On the other hand, the private residential rental index fell 0.9% quarter-on-quarter (q-o-q) in 4Q2017, after a period of stabilisation in the previous quarter.

Source: URA, EdgeProp.sg

One possible reason for this is because unlike cities like Hong Kong – widely regarded as another one of Asia’s most important financial centres – Singapore’s rental market is very much driven by foreign demand, given that over 80% of Singaporeans own a HDB flat.

In comparison, Hong Kong’s rental market is increasingly being driven by a mix of local and PRC tenants, often senior staff from funds and brokerages. Locals are being driven into the leasing market by sky high prices and the limited availability of larger newly completed apartments on Hong Kong Island, Savills Hong Kong says in its recent Residential Leasing Briefing report.

As of 2017, it is estimated that home ownership amongst Hong Kong’s population of 7.347 million stands only at about 49.20%, according to data by Trading Economics.

Source: Data.gov.hk, EdgeProp.sg

Understanding the dynamics of the rental market landscape helps provide insight into connections between demand and supply, where the hot commodities are, and where there could be room for negotiation.

Why have rentals been falling?

1) Falling foreign demand

We already know that foreign demand is an important driver in Singapore’s rental market. In previous years, the amalgam of slowing economic growth, weakening oil and gas sector, and the tightening of foreign worker policy have created a dampening effect on rentals.

Figures from the Ministry of Manpower (MOM) showed that the total foreign workforce in Singapore fell from 1.393 million in December 2016 to 1.368 million in December 2017. Further, the qualifying salary for foreigners to be hired on Employment Pass (EP) was raised from $3,300 to $3,600 from January 2017. An EP allows foreign professionals, managers and executives to work in Singapore.

Incidentally, the number of foreign professionals on EP fell from 192,300 in December 2016 to 187,700 in December 2017.

2) Diversification of expatriate roles:

It’s not just the tightening inflow of foreigners, many expatriates in Singapore today have also diversified beyond management roles and are no longer receiving lucrative packages, says Desmond Sim, CBRE’s head of Singapore and Southeast Asia research.

Sim explains: “Expatriate demand has been core to the rental market here, and this demand has traditionally encircled high-end properties within prime districts 9, 10 and 11.

“But times have changed. Today, many expats no longer receive “full expat packages”, which previously included cars and tuition fees for their children.

“Also, expats in executive positions are becoming increasingly common. Instead of upscale neighbourhoods like Ardmore, expats in these positions would typically opt to rent in the suburbs, where it is more affordable,” he shares.

Based on our analysis, average monthly rentals and average rental psf for studio, one-bedroom and two-bedroom units of non-landed residential properties in prime districts 9, 10, 11 and Downtown Core have been falling year-on-year from 1Q2012 to 1Q2018.

Source: URA, EdgeProp

In addition, more expats are moving into the HDB segment. However, the impact on the overall HDB market will not be significant, as condos remain the first pickings of expatriates, especially those from Anglo-Saxon countries, says CBRE’s Sim.

Will they eventually go back up?

There are signs pointing to a possible recovery in the residential rental market and this is primarily due to a decline in vacancy rate, which fell from 8.4% in 2016 to 7.8% in 2017.

This improvement was attributed to a diminished supply of newly completed private residential units in 2017. According to URA figures, there were 20,803 completed units in 2016 and 16,685 completed units in 2017. In comparison, a total of 10,634 private residential units are expected to complete in 2018.

The lower number of completions may further improve rental vacancy rates. However, Christine Li, director and head of research at Cushman & Wakefield notes that non-landed rents in the Outside Central Region (OCR) could still come under pressure, given that 50% of incoming supply is expected to be in OCR from 2018 to 2022.

The sizzling hot collective sales market is another factor that could possibly create an uplifting effect on rentals. Due to the flurry of en bloc activities since 2017, displaced owners of successful en bloc sales may require more time to look for a replacement home or wait at least 30 months before they can apply for a built-to-order (BTO) HDB flat.

While this is expected to improve occupancy rates for private properties in the short-term, CRBE’s Sim says it also depends on whether demand from the displacement will hold up once these en bloc beneficiaries secure their replacement units.

Further, foreign employment – core to Singapore’s private residential rental market – will likely remain subdued in the near future as rules on foreign employment continue to be tightened.

Most recently, the Ministry of Manpower (MOM) announced that the Fair Consideration Framework (FCF) – which requires employers to advertise job vacancies for 14 days on the national Jobs Bank before submitting employment pass (EP) applications – will be extended to firms with 10 or more employees and for jobs paying under $15,000 a month from July 1. Currently, it applies only to firms with at least 26 workers and for jobs paying under $12,000 a month.

The minimum qualifying salary to apply for an S-pass for foreign mid-skilled level staff will also be raised from $2,200 to $2,400 in phases starting from 1 Jan 2019.

With these new measures, and with more companies prioritising the hiring of local workers over foreigners, it is expected that rental demand could be affected, Savills Singapore says in its Residential Leasing Briefing 4Q2017 report.

Does it still pay to invest in rental property?

There is no hard or fast answer for this. However, having a good understanding of what does – and what doesn’t – make for a money-making rental property is a good place to start.

In a previous study, we looked at apartments and condominiums across Singapore that commanded gross rental yields of 4% and above and found that they have these three characteristics in common: proximity to the city centre, proximity to MRT stations and close distance to schools.

However, while rental yield is one of the most quoted indicators used when assessing a property’s investment potential, it is only one part of the investment of returns equation. When considering real estate investment, it is equally important that you understand its capital growth potential.

The general rule of thumb is, the lower the purchase price, the higher the potential for upside, and the higher the likelihood that rental yields will be favourable, such as these older freehold apartments at below $1,000 psf.